Laureate Education files IPO with $4.7 billion debt

When Baltimore-based Laureate Education filed for an initial public offering last week, it disclosed $4.7 billion in debt that has been cutting into the company's bottom line, with hundreds of millions in losses over the past several years.

The for-profit educational company was publicly traded until 2007, when its founder and a group of other investors took it private in a $3.8 billion buyout. Since then, the company has grown its web of career-focused universities — mostly outside the United States — but some analysts said it was time for Laureate to slow down and address its significant debt.

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"I would expect the company to focus on paying down debt right now," said Matt Kennedy, an analyst at Greenwich, Conn.-based Renaissance Capital, a manager of IPO-focused funds. "That's where the cash sweep is going to go."

But "even after the IPO it will be highly leveraged," he continued, "so that could be a concern for investors. You'll still see a significant portion of the company's net income being affected by interest payments."

Laureate began in 1989 as Sylvan Learning Systems, a provider of supplemental and remedial education services, and went public in 1993. It acquired its first college, Universidad Europea de Madrid, in 1999 and changed its name to Laureate Education in 2004.

Founder, chairman and CEO Douglas L. Becker and other investors took the company private in 2007; the investors included Kohlberg Kravis Roberts & Co. and Citigroup Private Equity. Becker said at the time he wanted to expand in Asia.

The company did grow rapidly, acquiring about 50 institutions since 2008. Now it offers more than 1 million students at 88 institutions in 28 countries career-focused degrees in fields such as business, engineering, health sciences, hospitality management, information technology, law and medicine.

The largest share of the institutions are in Latin America, but its reach extends to China, Australia, Portugal, Saudi Arabia and Morocco. It has five institutions in the United States, including Walden University, a Minneapolis institution that offers degrees online.

The rapid expansion ballooned its debt from about $1.1 billion to $4.7 billion. In the first half of this year, its interest payments totaled nearly $200 million, and it posted a $171 million loss in that period on nearly $2.2 billion in revenue. It has lost money every year since 2010.

It's not yet clear how much the IPO would raise, and it might not wipe out Laureate's debt entirely. In April the company was seeking to raise about $1 billion, according to Bloomberg. In its filing Friday with the U.S. Securities and Exchange Commission, Laureate used a place-holder of $100 million.

Still, the IPO "is going to make a big difference in their profitability," said Karyl Leggio, a finance professor at Loyola University Maryland. "Most companies carry debt, but they're going to have debt that's going to be a lot more manageable."

Leggio said it was "very common" for companies to go private with the intention of going public again later down the line. In retrospect, she said, the move to go private in 2007 might not appear to have been well-timed — it was right before the recession in 2008 — but it shouldn't be seen as a mistake.

"While they were private they were able to expand globally, and that was a big part of their plan," Leggio said.

The company has declined to comment beyond its filing until its IPO is approved, a process that could take weeks or months.

In its SEC filing Friday, Laureate noted that its debt load could have "important negative consequences to our business" and could limit its growth strategy. The company said it intended to use the proceeds from the IPO to repay debt and "for general corporate purposes."

Jim Kyung-Soo Liew, an assistant professor at Johns Hopkins' Carey Business School, said he didn't think Laureate's debt load was a major concern and said the company had done a great job expanding.

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"I think [Becker has been] trying to grow the top line and worry less about the bottom line, similar to Amazon," he said. "Obviously if you overdo it you'll be in a lot of trouble. At some point he's going to have to reduce expenses and reduce some of the debt burden on the company."

At Hopkins, Liew said, he noticed the demand abroad for high-quality higher education growing in recent years. He predicted that Becker's IPO would be successful.

"He's pretty much the Elon Musk" of the international for-profit educational field, Liew said, referring to the executive behind SpaceX, Tesla Motors and SolarCity. "He's going after a market that, sitting in the ivory tower, I feel has a lot of demand."

Laureate also filed Friday to convert from a traditional corporation to a public benefit corporation domiciled in Delaware. The switch would mean it must take into account the interests of its students and the public, rather than just shareholders.

Some saw that change as a marketing move. The for-profit higher education sector has been battered in the United States by criticism that it has saddled students with high levels of debt without delivering results of comparable value.

Corinthian Colleges, which operated Everest campuses in the United States and Canada, among other institutions, shut down this spring after the U.S. Department of Education fined it about $30 million for allegedly misleading students and loan agencies about the prospects for graduates to find jobs.

Laureate, with its focus on growing internationally, has avoided such scrutiny.

"Students want to feel good about their education institution rather than just thinking of it as a customer," said Jay R. Ritter, a professor at the University of Florida who studies IPOs.

Ritter said Laureate has found an underserved niche of career-focused education in developing countries.

"Throughout Latin America, the government-owned universities have not done a good job of providing mass higher education, which is why a company like Laureate is able to have a significant market share there," he said. "They're providing education for the high-paying jobs. There's certainly a niche that they're filling where there's less competition than from government-owned institutions than in the United States."

Marlene Star, who heads the industrial sector for the financial news and data company Mergermarket, said Laureate's uniqueness could be a selling point. There have been few companies going public this year that are as well known as Laureate, she said, which should be another benefit in the company's favor.

"The challenge for them is there aren't really perfect comps for them to be compared against in the IPO market," she said. "They're such a unique business. That's not necessarily a bad thing, they just have to find a way to tell their story."